By Keith Reid
We participate in a dynamic industry, driven by many smart and innovative people. To help spread their insightful voices we are launching a regular, featured column where we interview these thought leaders. What better way to kick things off than to interview strategic adviser Ron Sabia.
Sabia chairs the Fuels Institute, a non-profit think tank launched by NACS to evaluate transportation market issues and publish peer-reviewed, unbiased research to guide and inform industry stakeholders—from those trying to make strategic business decisions to policymakers considering legislation and regulations affecting the fuels and vehicles markets.
He has an extensive executive leadership background in the energy, midstream, distribution and multi-unit retail sectors with a strong focus on refined products and renewables supply, trading and marketing.
While president of Gulf Oil, Sabia presided over the greatest period of growth and profitability in the company’s history. Concurrently, he served as executive vice president of Cumberland Farms, and prior to joining Gulf, Sabia was senior vice president of marketing for TransMontaigne Product Services where he led business development around its terminal assets. Sabia also held leadership positions at Louis Dreyfus Energy and BP Oil.
Sabia currently provides strategic advisory services to market participants, infrastructure funds and energy investors by leveraging his extensive background. With that background in mind, we asked Sabia about the Fuels Institute and his perceptions on a range of industry issues and sectors.
FMN: What is the value of the Fuels Institute to the industry?
Sabia: Tremendous. I was fortunate to be involved [with the organization] from the beginning, and then lucky enough to eventually become the chairman. We are a very diverse organization with diverse points of view, which I think is unique. The diversity helps us all develop positions that are credible. When we provide input to Congress it’s not just from marketers and retailers and refiners. We have auto companies, biofuels manufacturers, consumer advocates and regulators on our board. Legislators pay more attention.
Our objective is unbiased research, and we do not take a position on the issues. However, we try to take on topics that will help shape the future of the market and fill in gaps in the research. For example, our Electric Vehicle Council started out looking at the charging infrastructure, and a lot of stakeholders became involved in that and are working to decide how build things out in a way that makes the most sense. We also launched our Diesel Fuel Quality Council to look at fuel quality issues across the industry and to try and develop best practices in handling. That is just a small sampling of what the Institute has worked on and has planned.
FMN: How congenial and how open-minded are Fuels Institute stakeholders who have traditionally butted heads over policy?
Sabia: It has been very congenial. Do folks disagree given their different points of view? Absolutely. And many have their own agendas. But that isn’t a bad thing. I don’t necessarily think the same way as someone else and being able to listen to their reasoning is incredibly helpful. You need to understand what they’re dealing with when you’re looking at potential solutions.
Obviously, there have there been times where folks on our Board have been unhappy with something we published. If it doesn’t match their agenda, they’re less than thrilled. That is to be expected when you have close to 40 people on your Board of Advisors—you can’t get 40 people to agree on what to have for lunch! But we do have a process where all points of view are considered and where the research is honest.
FMN: Since you mentioned the Electric Vehicle Council, how do you see the EV market developing?
Sabia: I believe it takes about 12 years to turn over the fleet. Even if EVs were 100% of sales—and it’s not close to that—it would take more than a decade. EV sales are only about 4% today. So, I just do not see that happening soon. Obviously, batteries are going to get more effective and the cost parity will get closer. But the vast majority of vehicles will be powered by liquid fuel for some time to come, though EVs will increasingly compete for gallons.
FMN: How has retail responded to the COVID crisis?
Sabia: They have done a phenomenal job with the tremendous challenge of completely revamping operations, housekeeping—everything—to keep their associates and their customers safe. The associates on the front lines at the convenience stores had this thrust upon them, and they did a tremendous job in a very difficult time.
FMN: What do you see from COVID lasting beyond the crisis?
Sabia: I think the effects of this will be with us for a while. Whatever recovery we have will be slow and long and arduous from a demand standpoint. I don’t see a change in the kind of housekeeping we have now adopted for quite a while. Is foodservice in for a very long recovery? We’re probably living in more of a commissary world for the foreseeable future.
What is going to be interesting are the societal COVID changes. Now that everybody’s telecommuted, how much does that trend into the future? Even if folks stay home for one day a week, that’s going to greatly change the demand structure. I could then make the opposite argument that no one’s going to want to ride on a train or a subway because they don’t want to be in that confined space. And then they all hop in their car and drive to work because that is their own personal pod.
FMN: What general trends do you see for the retail segment?
Sabia: I believe we will have further consolidation in the space. The smaller operations with a handful of sites and without good real estate, without good access to product, without financial strength, might get consolidated away. Then you have the chains that are, say, 20 to 100 stores but that don’t have a successor or a family member who wants to be involved. They may have wonderful assets and good people, and folks are looking for good sites to add to their network.
Transactions have slowed a bit during COVID, obviously, but we’ve had a very active acquisition market over the last couple of years. And the multiples were very, very good. With COVID it’ll be hard for [acquirers] to pay as high of a multiple, but there’s plenty out there looking for good assets.
FMN: What about consolidation on the distributor side?
Sabia: There are folks out there, but it depends on your markets and your assets. Given how thin distributor margins are now, it’s harder to pay a big number.
FMN: How did demand shock play out with retail fuel?
Sabia: It was interesting because you have this demand shock with the shutdowns. And we’re more used to dealing with a supply shock—one way or another. And we did get a supply shock at the same time as the demand shock. And that was really the unusual piece of this, and in some ways a saving grace for retailers. The OPEC+ non-agreement between Saudi Arabia and Russia, where they started putting barrels into the market and crude oil collapsed, that cratered the replacement costs for retailers, and their margins went up to remarkable levels.
FMN: And how is that cycle playing out as the crisis progresses?
Sabia: Depending on the market you’re in, that’s largely continued at the retail level. I have said from the beginning, it was going to be a race against time [until] volume and margins return to normal. For the most part, at least anecdotally from the folks I’ve spoken with, their margins have still been sufficient to more than offset volume loss. But as we know, over time those get competed away.
FMN: How has that impacted “inside the box.”
Sabia: If you are someone who has a foodservice offering—prepared food drinks and the like—you certainly suffered during COVID. Most everything was sold as pre-packaged. Some folks told me they were down 50 to 60% with coffee and certainly fountain drinks. Those are high-margin items to give up. I think those folks who usually would be on the front of the curve with higher margin service offerings probably took more of a hit than the traditional retailer.
FMN: How did COVID play out for the wholesalers?
Sabia: During the early stages of the quarantine shutdown, branded wholesale margins expanded to offset the loss in branded volume, leaving gross margins relatively flat. On the other hand, unbranded wholesalers lost volume without the commensurate expansion in unit wholesale margin reducing overall gross margin. Over time, branded unit margins reverted to normal, and overall gross margin suffered as volume has not recovered.
As we touched on earlier, companies that also had retail margin exposure did better as extraordinary retail margins more than offset volume loss and continue to do so.
Companies that supplied their own barrels and had access to storage had a great opportunity to take advantage of the historic contango in the market, the widest I have witnessed in my career.
FMN: If you had one word of advice to give to a retailer today, what would that be?
Sabia: I would say, flexibility. You’ve got to be nimble, think forward and adjust to changes in the market.
FMN: If you had one word of advice to give to a distributor?
Sabia: Efficiency. They’re in a very tough market, and for them it’s lots of small margin transactions and being able to grow your business without adding cost is critical.